Latin America (LA) is historically characterized by extreme
inequality with low tax collection, where a significant portion of
the population lives in poverty. However, the region has managed to
reduce its inequality levels over the first decade of the 21st
century. Its countries’ economic growth has improved, and efforts to
reduce the population living in poverty have proven successful.
Nonetheless, there is still a long way to go in order to create
equality for all.

In 2015, ECLAC (the English acronym of CEPAL) released a book with
the purpose of maintaining equality as the region’s priority, as
well as providing guidance for the formulation of a progressive tax
policy that addresses inequality. While it is a supra-national actor
in LA, it aims to contribute to the region’s agenda on tax policy
formulation by providing a theoretical approach that can be useful
for both policy makers and scholars. The book was edited by Juan
Pablo Jiménez, ECLAC’s Economic Affairs Officer. Each chapter
features different collaborations from authors with academic
background in Economics. Throughout three chapters, the book
emphasizes the importance of using complete, up-to-date, and
reliable databases to analyze income evolution. It highlights the
current pitfalls of household surveys in accurately reflecting
inequality levels and presents complementary methods to reduce this
gap. ECLAC aims to raise awareness of the fact that the wealthiest
earners in Latin American (LATAM) countries are not contributing to
taxation in accordance with their income levels. Furthermore, it
provides fiscal tools that can improve both the contributions of
high-income earners and the progressivity of tax schemes.

Chapter one is a collaboration between Veronica Amarante, ECLAC’s
office director in Montevideo, and Juan Pablo Jiménez. It highlights
the current lack of information on wealthy earners in LATAM
countries. Although efforts are made to collect information by means
of household surveys, data is not systematically collected, and
there is additional need for long-term data. In general, household
surveys fail to collect accurate information from the highest
deciles, which affects accuracy of inequality calculations.
Availability of adequate and reliable information can contribute to
a more realistic inequality indicator and to a better analysis of
income distribution evolution, as well as support formulation of
progressive tax reforms.

Amarante and Jiménez point out that the region has improved its
indirect redistribution capacity through government expenditure.
However, its direct redistribution impact is limited due to low tax
collection. They also explore income tax limitations. Firstly, the
highest proportion of wage earners is located under the lowest tax
bracket, due to low wages, which considerably shrinks the tax base.
Secondly, a significant amount of tax exemptions allows high-income
earners to pay less than taxpayers with lower income levels.
Finally, there is a high level of evasion, non-compliance, and
under-taxation.

The authors recommend using an improved wealth indicator that
considers assets, debts, income, and expenditure, along with the
incorporation of fiscal data, to create a more robust framework to
analyze the evolution of income distribution. In order to reach the
highest deciles of the population, they propose establishing taxes
on property. Additionally, they propose taxing labor and capital
incomes together, as the highest deciles’ income has increased
through capital, rather than labor, over the last decades.

Chapter two, a collaboration between Juan Carlos Gómez Sabaíni and
Darío Rossignolo, both ECLAC’s consultants, presents the latest
trends in inequality and tax reforms of the region. Throughout the
last decade, the region has managed to reduce its inequality levels.
However, LATAM economies, in general, significantly rely on natural
resources and primary products. The authors fail to analyze the
influence of commodity prices on this downward trend.

The authors present a conceptual framework that highlights the
influence of the highest deciles on income tax collection
efficiency. Various schemes and poorly defined criteria to address
labor and capital income lead to horizontal inequality. Nonetheless,
the latest fiscal reforms undertaken in LA have created valuable
improvements in terms of the tax scheme composition, attributing
more importance to direct taxes and improving the progressivity of
the collection system.

Chapters one and two support the imperative need for the region to
have more information and accurate databases to better understand
the income evolution of the top decile. Likewise, they point out as
a major Gini index pitfall its tendency to neglect the transfers
occurring among the extremes of income distribution – transfers that
better reflect actual inequality trends. By analyzing different
cases, Sabaíni and Rossignolo demonstrate the importance of
complementing the information used to measure inequality, such as
including fiscal reports or adjustments for under-reporting, in
order to achieve more accurate indicators.

Besides supporting Amarante and Jiménez’ proposal of reducing
exemptions to broaden the tax base, Sabaíni and Rossignolo present
two remarkable proposals that target generalized practices in the
region. The first one is to improve management of fiscal resources.
Taxpayers perceive that access to information related to use of
fiscal resources is difficult and incomplete, which encourages tax
evasion. Improving resource management could boost institutional
reliability and reduce evasion levels. The second proposal focuses
on updating property databases. In many countries of the region,
land and property databases do not reflect the properties’ current
characteristics, which leads to underpayment of property taxes. By
updating these databases, owners will pay taxes accordingly – an
efficient strategy to tax high-income earners and thus improve tax
collection.

Through a case study of Uruguay, the last chapter presents the
possibility of improving inequality measurements by complementing
information collected by household surveys with fiscal data and
social service contributions. Likewise, this case study finds that
the average income increase of the country has been captured by the
top 1%. Additionally, among the highest decile, the top 1% has
absorbed the highest proportion of income.

In conclusion, the text presents the current advancements of LATAM
countries regarding inequality improvement and measurement in
general. It strongly calls for better databases and highlights the
need for more research on income evolution using complementary
information that leads to more accurate indicators. Overall, it
misses details on the potential regressive effects that the taxing
alternatives presented could feature. Its analysis also fails to
include the role of the informal sector and the highest deciles’
participation in it. However, it does present interesting
alternative taxing options to reach high-income earners. The text
aptly provides a clear perspective of the region’s inequality levels
and presents the benefits and limitations of a complementary
framework to measure inequality.